July’s Employment Report Was Puzzling

The headline numbers in Michigan’s employment report for July are all bad, but the overall picture is more mixed. Michigan’s unemployment rate tipped up 0.4 percentage points in July to 10.9 percent. In addition, while Michigan’s unemployment rate is well below last July’s 12.4 percent reading, the decline is due to people exiting the labor force rather than an increase in employment.

Michigan’s unemployment rate is based on a household survey. This survey shows that Michigan employment is actually down 4,000 jobs compared to last July, while the labor force fell by 83,000. Those exiting the labor force are not counted when calculating the unemployment rate resulting in the unemployment rate drop. It is hard to feel good about an unemployment rate drop attributable to a labor force drop as it suggests discouraged workers abandoning their job search.

Michigan’s July employment report also contains the results of an employer or payroll survey, generally considered to be more accurate than the household survey reading. The payroll reading shows Michigan employment up by 60,000 jobs since last July, a respectable 1.5 percent increase.

It is always a little troubling when economic indicators tell differing stories. The household survey has employment flat year over year while the payroll survey is up 1.5 percent. Fortunately, additional insight can be gained by looking at income tax withholding. Employment numbers get revised, but income tax withholding represents money in the door. The income tax withholding results are more in line with the payroll survey. The year over year change in income tax withholding averaged over 6 months (to smooth out volatility) was a solid 4.8 percent in July suggesting that Michigan’s labor market has in fact improved, and at least for now, we should discount the results of the household survey.